First American Financial Reports First Quarter 2017 Results

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First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today announced financial results for the first quarter ended March 31, 2017.

Current Quarter Highlights

  • Total revenue of $1.3 billion, up 10 percent compared with last year
  • Purchase revenues up 13 percent compared with last year
    • Average revenue per order up 8 percent
    • Closed orders per day up 4 percent
  • Commercial revenues of $146.3 million, up 2 percent compared with last year
  • Title Insurance and Services segment pretax margin of 8.2 percent
  • Title Insurance and Services segment loss provision rate of 4.0 percent
  • Specialty Insurance segment total revenues up 7 percent, with a pretax margin of 9.1 percent
  • Debt-to-capital ratio of 19.3 percent as of March 31, 2017
 

Selected Financial Information

($ in millions, except per share data)

 
      For the Three Months Ended
March 31
2017  

 

  2016
Total revenue $ 1,317.0     $ 1,201.7
Income before taxes 83.9 75.6
 
Net income $ 58.3 $ 52.5
Net income per diluted share 0.52 0.47
 

Total revenue for the first quarter of 2017 was $1.3 billion, an increase of 10 percent relative to the first quarter of 2016. Net income in the current quarter was $58.3 million, or 52 cents per diluted share, compared with net income of $52.5 million, or 47 cents per diluted share, in the first quarter of 2016. Net realized investment losses in the current quarter were $0.1 million, compared with gains of $5.1 million, or 3 cents per diluted share, in the first quarter of last year. This quarter’s effective tax rate of 30.8 percent includes a benefit of $2.4 million, or 2 cents per diluted share, due to a new accounting requirement related to stock-based compensation. This compares to the first quarter of 2016 effective tax rate of 30.3 percent, which included favorable tax items totaling $3.8 million, or 3 cents per diluted share.

“The year is off to a good start, with total revenue up 10 percent,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “While refinance headwinds remain, our purchase business is performing well as we move into the spring selling season, with the average fee per file continuing to show strong growth. Conditions remain good in our commercial business, with revenues up 2 percent from last year. The market outlook, combined with our continued operating efficiency, positions us well for 2017.

“We reduced our title loss provision rate this quarter to 4.0 percent, which reflects the expected claim losses for the 2017 policy year. We lowered the rate in light of favorable economic conditions, the current strength of our reserves, our improved claims experience over the past few years, and process improvements in the company’s underwriting and claims practices.

“Lastly, given the importance of people to our business, I’m proud that the company was named on the Fortune 100 Best Companies to Work For® list for the second year in a row in 2017.”

 

Title Insurance and Services

($ in millions, except average revenue per order)

 
      For the Three Months Ended
March 31
2017       2016
Total revenues $ 1,202.9       $ 1,098.5
 
Income before taxes $ 98.2 $ 87.7
Pretax margin 8.2 % 8.0 %
 
Direct open orders 259,600 302,900
Direct closed orders 191,300 193,100
 
U.S. Commercial
Total revenues $ 146.3 $ 142.9
Open orders 31,400 31,800
Closed orders 19,200 18,900
Average revenue per order $ 7,600 $ 7,600
 

Total revenues for the Title Insurance and Services segment during the first quarter were $1.2 billion, a 10 percent increase from the same quarter of 2016. Direct premiums and escrow fees were up 4 percent compared with the first quarter of 2016, driven by a 5 percent increase in the average revenue per direct title order that was partially offset by a 1 percent decline in the number of direct title orders closed. The growth in the average revenue per direct title order to $2,035 was primarily attributable to the shift in the order mix to higher-premium residential purchase and commercial transactions. Agent premiums were up 12 percent in the current quarter compared with last year, largely reflecting the normal reporting lag of approximately one quarter.

Information and other revenues were $180.0 million this quarter, an increase of $25.8 million, or 17 percent, compared with the same quarter of last year. This increase was driven by the impact of recent acquisitions.

Investment income was $26.6 million in the first quarter, up $1.7 million, or 7 percent, primarily due to an increase in interest income as a result of higher average invested balances in our debt securities portfolio. Net realized investment losses totaled $0.2 million in the current quarter, compared with gains of $3.0 million in the first quarter of 2016.

Personnel costs were $384.8 million in the first quarter, an increase of $29.8 million, or 8 percent, compared with the same quarter of 2016. This increase was driven by the impact of recent acquisitions, higher salary expense due to annual merit and other salary increases, and an increase in incentive compensation as a result of higher revenue and profitability. These increases were partially offset by lower temporary labor and overtime expense in the current quarter.

Other operating expenses were $183.3 million in the first quarter, up $17.8 million, or 11 percent, compared with the first quarter of 2016. The increase in expenses during the quarter was primarily attributable to recent acquisitions, as well as to lower expenses in 2016 resulting from the favorable impact of an insurance claim recovery.

The provision for policy losses and other claims was $39.9 million in the first quarter, or 4.0 percent of title premiums and escrow fees, compared with a 5.5 percent loss provision rate in the first quarter of 2016. The current quarter rate reflects an ultimate loss rate of 4.0 percent for the current policy year and no change in the loss reserve estimates for prior policy years.

Depreciation and amortization expense was $28.6 million in the first quarter, an increase of $7.5 million, or 35 percent, compared with the same period last year. The increase was primarily attributable to $3.4 million in amortization expense from internally developed software, including $2.0 million from the acceleration of amortization due to the shortened useful life of a software interface, and $3.3 million in purchased software licenses that were previously included in other operating expenses.

Pretax income for the Title Insurance and Services segment was $98.2 million in the first quarter, compared with $87.7 million in the first quarter of 2016. Pretax margin was 8.2 percent in the current quarter, compared with 8.0 percent last year.

 

Specialty Insurance

($ in millions)

 
      For the Three Months Ended
March 31
2017       2016
Total revenues $ 110.3       $ 103.0
 
Income before taxes $ 10.0 $ 12.2
Pretax margin 9.1 % 11.9 %
 

Total revenues for the Specialty Insurance segment were $110.3 million in the first quarter of 2017, an increase of 7 percent compared with the first quarter of 2016. The increase in revenues was primarily driven by higher premiums earned in the home warranty business line. The loss ratio in the Specialty Insurance segment this quarter was 59.5 percent, compared with 57.8 percent in the first quarter last year. The loss ratio in the home warranty business improved this quarter, as operational improvements drove lower claim severity. However, substantially higher claim losses in the property and casualty business due to West Coast winter storm events led to the higher loss ratio for the segment overall. As a result, the pretax margin for the segment in the current quarter was 9.1 percent, compared with 11.9 percent in the first quarter of last year.

Pension Termination Update

The termination of the company’s pension plan is proceeding on schedule, with expected completion in the second quarter of 2017. Upon completion, the company expects to record a $159 million expense in the corporate segment. This expense will have a negligible impact on stockholders’ equity, since almost all of the loss is already reflected on the balance sheet. Upon final termination, the company expects an annual reduction of approximately $22 million in personnel expenses in the corporate segment, based on the level of these expenses in 2016.

Teleconference/Webcast

First American’s first quarter 2017 results will be discussed in more detail on Thursday, April 27, 2017, at 11 a.m. EDT, via teleconference. The toll-free dial-in number is 877-407-8293. Callers from outside the United States may dial +1-201-689-8349.

The live audio webcast of the call will be available on First American’s website at www.firstam.com/investor. An audio replay of the conference call will be available through May 11, 2017, by dialing 201-612-7415 and using the conference ID 13658887. An audio archive of the call will also be available on First American’s investor website.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

Website Disclosure

First American posts information of interest to investors at www.firstam.com/investor. This includes opened and closed title insurance order counts for its U.S. direct title insurance operations, which are posted approximately 10 to 12 days after the end of each month.

Forward-Looking Statements

Certain statements made in this press release and the related management commentary contain, and responses to investor questions may contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and may contain the words “believe,” “anticipate,” “expect,” “intend,” “plan,” “predict,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases or future or conditional verbs such as “will,” “may,” “might,” “should,” “would,” or “could.” These forward-looking statements include, without limitation, statements regarding future operations, performance, financial condition, prospects, plans and strategies. These forward-looking statements are based on current expectations and assumptions that may prove to be incorrect. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include, without limitation: interest rate fluctuations; changes in the performance of the real estate markets; volatility in the capital markets; unfavorable economic conditions; impairments in the company’s goodwill or other intangible assets; failures at financial institutions where the company deposits funds; changes in applicable laws and government regulations; heightened scrutiny by legislators and regulators of the company’s title insurance and services segment and certain other of the company’s businesses; use of social media by the company and other parties; regulation of title insurance rates; limitations on access to public records and other data; changes in relationships with large mortgage lenders and government-sponsored enterprises; changes in measures of the strength of the company’s title insurance underwriters, including ratings and statutory capital and surplus; losses in the company’s investment portfolio; material variance between actual and expected claims experience; defalcations, increased claims or other costs and expenses attributable to the company’s use of title agents; any inadequacy in the company’s risk mitigation efforts; systems damage, failures, interruptions and intrusions or unauthorized data disclosures; errors and fraud involving the transfer of funds; the company’s use of a global workforce; inability of the company’s subsidiaries to pay dividends or repay funds; inability to realize the benefits of, and challenges arising from, the company’s acquisition strategy; and other factors described in the company’s annual report on Form 10-K for the year ended December 31,2016, as filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Use of Non-GAAP Financial Measures

This news release and related management commentary contain certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP), including personnel and other operating expense ratios, and success ratios. The company is presenting these non-GAAP financial measures because they provide the company’s management and investors with additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company’s competitors. The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In this news release, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

 
First American Financial Corporation
Summary of Consolidated Financial Results and Selected Information
(in thousands, except per share amounts and title orders)
(unaudited)
 
     

For the Three Months Ended

March 31
2017       2016
     
 
Total revenue $ 1,317,043 $ 1,201,712
 
Income before income taxes $ 83,880 $ 75,592
Income tax expense   25,811     22,920
Net income 58,069 52,672

Less: Net (loss) income attributable to noncontrolling interests

 

(213 ) 171
Net income attributable to the Company $ 58,282   $ 52,501
 
Net income per share attributable to stockholders:
Basic $ 0.52 $ 0.48
Diluted $ 0.52 $ 0.47
 
Cash dividends declared per share $ 0.34 $ 0.26
 
Weighted average common shares outstanding:
Basic 111,179 110,149
Diluted 111,822 110,670
 

Selected Title Information

 
Title orders opened (1) 259,600 302,900
 
Title orders closed (1) 191,300 193,100
 
Paid title claims $ 51,008 $ 56,690
 
(1)   U.S. direct title insurance orders only.
 
 
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
 
      March 31,       December 31,
2017 2016
 
Cash and cash equivalents $ 1,047,467 $ 1,006,138
Investment portfolio 5,182,909 5,140,699
Goodwill and other intangible assets, net 1,095,787 1,096,315
Total assets 8,874,436 8,831,777
Reserve for claim losses 1,013,465 1,025,863
Notes and contracts payable 735,549 736,693
Total stockholders' equity $ 3,072,462 $ 3,008,179
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
 
For the Three Months Ended             Title       Specialty       Corporate

March 31,2017

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 527,009 $ 421,959 $ 105,050 $ -
Agent premiums 574,582 574,582 - -
Information and other 182,509 180,035 2,739 (265 )
Net investment income 33,040 26,616 2,329 4,095
Net realized investment (losses) gains (1)   (97 )   (244 )   147   -  
  1,317,043     1,202,948     110,265   3,830  
Expenses
Personnel costs 415,130 384,836 17,263 13,031
Premiums retained by agents 453,926 453,926 - -
Other operating expenses 207,409 183,271 17,285 6,853
Provision for policy losses and other claims 102,388 39,861 62,527 -
Depreciation and amortization 30,147 28,552 1,551 44
Premium taxes 15,448 13,848 1,600 -
Interest   8,715     409     -   8,306  
  1,233,163     1,104,703     100,226   28,234  
       
Income (loss) before income taxes $ 83,880   $ 98,245   $ 10,039 $ (24,404 )
 
 
 
For the Three Months Ended Title Specialty Corporate

March 31,2016

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 501,914 $ 404,039 $ 97,875 $ -
Agent premiums 512,245 512,245 - -
Information and other 155,077 154,263 820 (6 )
Net investment income 27,370 24,926 2,236 208
Net realized investment gains (1)   5,106     2,997     2,109   -  
  1,201,712     1,098,470     103,040   202  
Expenses
Personnel costs 382,712 355,080 16,779 10,853
Premiums retained by agents 405,039 405,039 - -
Other operating expenses 186,675 165,498 14,752 6,425
Provision for policy losses and other claims 107,098 50,516 56,582 -
Depreciation and amortization 22,420 21,076 1,248 96
Premium taxes 14,377 12,941 1,436 -
Interest   7,799     645     -   7,154  
  1,126,120     1,010,795     90,797   24,528  
       
Income (loss) before income taxes $ 75,592   $ 87,675   $ 12,243 $ (24,326 )
 
(1)   Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in net investment income.
 
 
First American Financial Corporation
Expense and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
 
 
      For the Three Months Ended
March 31
2017       2016
 
 
Total revenues $ 1,202,948 $ 1,098,470
Less: Net realized investment (losses) gains (244 ) 2,997
Net investment income 26,616 24,926
Premiums retained by agents   453,926     405,039  
Net operating revenues $ 722,650   $ 665,508  
 
 
Personnel and other operating expenses $ 568,107 $ 520,578
Ratio (% net operating revenues) 78.6 % 78.2 %
Ratio (% total revenues) 47.2 % 47.4 %
 
 
Change in net operating revenues $ 57,142
Change in personnel and other operating expenses 47,529
Success Ratio (1) 83 %
 
(1)   Change in personnel and other operating expenses divided by change in net operating revenues.
 
 
First American Financial Corporation
Supplemental Direct Title Insurance Order Information (1)
(unaudited)
 
      Q117       Q416       Q316       Q216       Q116
Open Orders per Day
Purchase 1,977 1,623 2,110 2,272 1,966
Refinance 1,236 1,777 2,574 2,128 1,971
Refinance as % of residential orders 38 % 52 % 55 % 48 % 50 %
 
Commercial 507 484 492 501 512
Default and other   468     403     525     533     435  
Total open orders per day   4,187     4,287     5,702     5,434     4,885  
 
Closed Orders per Day
Purchase 1,298 1,504 1,645 1,667 1,248
Refinance 1,030 1,758 1,714 1,428 1,206
Refinance as % of residential orders 44 % 54 % 51 % 46 % 49 %
 
Commercial 310 340 318 310 305
Default and other   448     475     518     410     356  
Total closed orders per day   3,085     4,076     4,194     3,816     3,115  
 
Average Revenue per Order (ARPO)
Purchase $ 2,215 $ 2,206 $ 2,193 $ 2,138 $ 2,046
Refinance 912 899 880 879 877
Commercial 7,617 8,808 8,162 8,379 7,567
Default and other 238 199 170 257 378
 
Total ARPO $ 2,035 $ 1,958 $ 1,859 $ 1,972 $ 1,943
 
Business Days 62 62 64 64 62
 

(1)

  U.S. operations only.
 
Totals may not add due to rounding.
 

More news and information about First American Financial Corporation

Published By:

Business Wire: 11:45 GMT Thursday 27th April 2017

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